Keys to success in build-to-rent property in Australia

As build-to-rent moves from the niche to the mainstream there are several key considerations for success, according to Christian Grahame, Head of HOME, which is Australia’s largest build-to-rent platform developing and managing properties across the country.

Mr Grahame, who is also Chair of the Property Council’s National BTR Roundtable, speaking at the recent PFA 2024 Conference on the Gold Coast, said market conditions including residential property shortages would continue to drive interest in build-to-rent. “We’ve had strong population growth for the last couple of decades and this doesn’t look like abating. That growth is very attractive for institutional investors from offshore looking into Australian living sectors.

“We are experiencing well-established residential shortages, and the supply is not likely to be coming back anytime soon. Australia needs more residential solutions and build-to-rent can play a much bigger role in our nation’s residential property sector.”

Build-to-rent may currently be niche in Australia but is well established in other markets. “Build-to-rent makes up a much higher proportion of overseas living sectors. In the USA build-to-rent is up to 25% of the institutional real estate market, and in the UK it is approaching 5%. The UK is about seven years ahead of us, and while I’m not suggesting we’ll get to that level, our build-to-rent growth is tracking the UK.”

He said forecast completions of apartments under construction suggest chronic undersupply continuing for Australia. Research from Colliers forecasts that Sydney will have 10 new people per apartment by the start of 2026 – with Melbourne to have 16 new people per apartment, and Brisbane more than 30 new people per apartment.

“This shows the dramatic lack of supply, which is going to have impact on rents and values for some time as it is difficult to correct quickly.

“These background conditions are globally attractive. However, economically it’s not all roses and there are several pre-requisites for build-to-rent success in the Australian market.”

Success factors for build-to-rent in Australia

Mr Grahame said scale, amenity and location are keys to a successful build-to-rent development. “These projects can hit the sweet spot in delivering what tenants want, and it all starts with the location and amenity.

“Build-to-rent projects are often mixed use, incorporating retail, co-working, wellness and other businesses and services. As we are not beholden to pre-sales we can get on and develop an entire precinct, which provides the right mix of amenity for tenants.

“Generally, you need scale in this business. You need at least 300 apartments to run and offer in-building services, such as concierge. And around 3,000-plus apartments are generally regarded as providing an efficient portfolio for internal operations and management.”

Ultimately, he said it is all about the tenants, and building communities. “We always have one eye on the capital because it is so capital intensive, but the other always on the customer. Managing a build-to-rent building doesn’t stop at the end of the working day, it’s a very management intensive business. Our communities operate 365 days of the year.

“You need to have a love for people and the customer to do well in this sector.”

Regarding the capital, Mr Grahame said build-to-rent is capital intensive and that much of the heavy lifting has come via offshore institutional investors, which have funded around 80% of projects including those developed by HOME. “So far there has been approximately $12 billion in total investment raised, which has helped demonstrate proof-of-concept.

“Eventually we need domestic super funds to be involved to take it to the next level.”

Proof-of-concept and the Australian build-to-rent experience

The Australian build-to-rent market commenced with the Commonwealth Games Village at the Gold Coast, completed in 2016. “This project showed that it could be done and is operating very successfully now, and has had steady rent growth in the meantime”, Mr Grahame said.

“Australian groups have continued to demonstrate proof-of-concept in Australia. Current projects are around 90-95% leased.

“Customer satisfaction has been high but it comes down to standard of the apartment, and the amenity. For example, is the co-working space somewhere I really want to work? Is the gym something I really want to use, or are these ancillary? Safety and service is also highly valued.”

Mr Grahame said that, on recent experience, build-to-rent developments should expect an investment rate of return (IRR) greater than 10-15% after tax, depending on the level of risk, and as an income yield. He said given the prevalence of foreign capital, the Government’s proposed MIT changes will be critical to create incentives for inbound capital.

On sustainability, build-to-rent projects have proven to be high performers. “The sustainability standard is generally high in Australian BTR, and we are always working towards sustainable targets including Green Star certification. It’s relatively easy because the buildings are new, and it’s much easier to include these from the very start.”

While build-to-rent has grown quite steeply from a low base, there remains lots of potential, according to Mr Grahame. A recent EY report suggested BTR could provide 150,000 new homes over the next 10 years with the right tax and planning settings.  “If the settings are right build-to-rent arguably has more potential size than student accommodation and retirement living to add incremental supply as well as a varied product that can appeal to a range of cohorts.

“Australian groups have demonstrated that they can create and operate apartments communities as good as anywhere else in the world. The task now is to attract local and offshore capital at scale so the sector can reach its full potential, and play its part in solving Australia’s housing crisis.”

Please contact pfa@propertyfunds.org.au with any questions.